What is Breakout in trading is considered an important concept that needs to be deeply understood. An assistant to help price action traders increase their ability to make significant profits. Join Learn Forex Trading to discover What is Breakout in trading and corresponding trading strategies on the forex exchange. To optimize transaction performance and apply flexibly.
What is Breakout in Trading?
Many investors may face challenges when wanting to better understand the concept of What is Breakout in trading. How to distinguish between real break-out points and fake break-out signals on the forex exchange.
What is Breakout in Trading?
Breakout, also known as a break. A phenomenon in which the value of an asset suddenly increases or decreases. Break through the resistance or support level. These levels often reflect confrontation and conflict between buying and selling groups based on market history. Resistance lines are often formed by connecting peak points. While the support line is determined by connecting the bottom points.
At the same time, the breakout strategy is a trading method based on the current trend on the forex exchange. Focus on catching the breakout event, where the asset value is likely to continue on an upward or downward trajectory after the breakout has occurred. The investor’s goal is to execute the trade right at the breakout point. Then monitor the market until volatility decreases and profits reach expectations.
Note when breaking out on the Forex exchange
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Note that the breakout is only confirmed when the candle closes above the resistance level or below the support line. If the candle just “pokes” through this level but the closing price is still below the resistance line or above the support line, this cannot be considered a breakout point.
For example, when the price breaks out of the resistance line, this means that the candle’s closing price is above the resistance area. In theory, when the price moves from the bottom up and faces a resistance line. There could be a significant amount of selling to push the price back down.
When the strong selling force fails, the price will break out of the resistance line. Creates a positive signal, stimulating traders to buy. At this time, the market may witness the emergence of a strong buying motivation. Pushing prices to continue their journey up.
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Types of breakouts on the forex exchange
However, the reality of trading on the forex exchange is not as simple as the theory describes. In the foreign exchange market, price fluctuations are often dominated by large organizations. Commonly known as “shark”. Large investors often take advantage of market psychology to create fake breakout points. Creates misunderstanding for many transactions.
Therefore, when identifying breakout points, investors need to distinguish between two types of breakouts: real breakouts and fake breakouts. This is an important skill to avoid making incorrect investment decisions.
Fake breakout
A false breakout occurs when the price crosses a specific trendline. But do not maintain the direction of movement in the correct direction of the breakout. Instead, suddenly change the direction of movement to the opposite direction. If mistaken for a real breakout, long orders can be caught at the top. While short orders may face the risk of being provoked at the bottom. This poses the biggest concern for investors when it comes to distinguishing between real breakouts and fake breakouts in the foreign exchange market.
To identify fake breakouts, the first important factor to note is trading volume. An unsuccessful breakout is often accompanied by low trading volume. Shows that there is a high possibility that the price is not strong enough to overcome the support or resistance level. Instead, the market may return to moving in the accumulation zone.
Real Breakout
Different from a false breakout, a real breakout is an event when the asset price increases or decreases in the direction of the breakout line. Opens up clear opportunities for investors to identify and determine profitability levels. Identifying the true breakout point is extremely important. Because it helps investors facilitate profits. Significantly reduce the risk of account burning.
Signs of success in What is Breakout in trading?
The next section will provide some useful hints to help you overcome the challenge of “how to identify a reliable breakout point when placing a trade”. This can be considered a difficult challenge that many investors often face.
Closing price and breakout point filtering threshold
Observing the closing price of the candle is an important factor to pay attention to when applying the breakout method in trading. Candle type can be daily, hourly, or weekly. Depends on your trading time frame choice. In fact, closing prices provide reliable information. It represents the final price at which the buying and selling sides “combined” each other.
Furthermore, using a threshold to filter the breakout point is associated with the closing price. Thereby increasing accuracy when confirming a real breakout point. This means assessing the degree to which the price has broken through the support or resistance level in the direction of the breakout.
Based on forex exchange liquidity
Applying a breakout strategy in trading means having the flexibility to adapt to current market mechanisms. Willingness to buy at a high price to sell at a higher price. This means the market trend needs to be strong enough to overcome traders’ hesitation and create a desire to buy.
An important factor to evaluate the strength of a market trend is liquidity. It is understood as the level of buying/selling transactions that take place quickly but do not significantly affect the price. According to the experience of professional traders, when the price breaks the resistance level, the increase in liquidity should be at least 50% compared to the average of the previous twenty trading sessions. This is especially important when the price is in a downtrend, as liquidity may not be as effective as in the case of an uptrend.
Rely on breakout trading indicators
For every trading strategy, the use of indicators is an important factor to consider. Specifically, in the case of an uptrend move, if the price breaks out of the resistance level but at the same time a negative divergence appears, this is a noteworthy signal and worth considering. On the contrary, in the case of a downtrend, if the price drops and breaks the support zone with a positive divergence, traders also need to ask questions and consider carefully before deciding to open an order.
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How to trade breakouts
How to trade wisely What is Breakout in Trading? Here is a strategy that can be set up as follows:
- First entry: Place an order when a breakout appears. This order only accounts for 30% of the trading volume. If this is a real breakout point, you can make a profit, but if it is a fake breakout, the loss will not be significant.
- Second entry: Place an order at the support or resistance level. This order should have a higher price than the first order.
- Third order entry: Place an order when the price has retested the support and resistance area. The probability of success here is very high.
- Fourth order…: Continue to place an order with a small lot size and a higher price than the previous order.
How to trade breakouts
Note: Find out what is a stop loss and place it for each order to protect your investment capital. Although this method may generate low profits, it is a safe way and never misses an opportunity at a good price.
In addition, another strategy suitable for investors who like risk and want to achieve big profits is to open an order when the candle shadow crosses the resistance/support area while the candle has not yet closed. Another option is to wait for the price to return to retest the trendline after the breakout. However, this method has the risk that you may miss opportunities as the price does not always pull back after the breakout.
Conclude
If you have read to the end of the Learn Forex Trading article, hopefully, the question about What is Breakout in trading is no longer difficult for you. Instead, the challenge now is how to avoid false breakouts in all situations and apply an effective trading method when encountering a real breakout point. This is a challenge for many traders, especially for those new to the forex market.
A few questions related to What is Breakout in trading
How to distinguish between real and fake breakouts?
To distinguish between real and fake breakouts on the forex market, investors can focus on several important factors such as trading volume, consensus from various technical indicators, and retests of price after the breakout.
What is a wise breakout trading strategy?
This strategy requires the division of orders to reduce risk. This includes having different entries at breakout and pullback points, while also placing stop losses to protect invested capital.
How to control risk when trading breakouts?
To control risk, the most important thing is to set a stop loss for each order. In a wise breakout strategy, each entry needs to be accompanied by determining the stop loss level to ensure the safety of investment capital.
